Key Factors in Determining the Value of Your Business

Oct 15, 2018

The market value of your business, also known as a business valuation, is an approximation of how much a buyer would be willing to pay for your business. There are a number of different factors to consider when trying to estimate this value, other than just assets and revenue, and the considerations can vary based on the industry you are in. At the end of the day, your business is worth only what someone is willing to pay for it, but knowing the value ahead of time could give you a chance to increase it, if you are considering selling your company.

Keep in mind that these are guidelines and the best way to get an accurate valuation is to consult a professional, such as a business broker, who would not only consider all potential factors when determining the value of the business, but also have the best leverage when it comes to marketing and finding a buyer for your business.

Financial History

Income is always an important factor, but a potential buyer will be interested in seeing how your financials are trending, and not just your total earnings. They will want to know in which direction revenue and expenses have been trending over the past several years. An increased growth in revenue over the past few years will affect the valuation positively. Conversely, if expenses are increasing at a higher rate than profits, it could affect the valuation negatively. Strong financials help increase the value if your business. Financial documents such as profit and loss statements, balance sheets, and tax returns will help determine this.

Cash Flow

Cash flow is also integral to estimating the market value of your business. If a business has a high fixed assets base or requires high working capital, more of the profits will need to be reinvested back in the business, which will reduce the available cash flow, and subsequently lower its overall value. Generally, revenue is a secondary to cash flow when determining the value of a company. While assets can increase the value of your business, they can also lower it, because they require a higher reinvestment of profits, therefore reducing cash flow.

Future Growth

The potential for growth is a key indicator in projecting the future performance of a company. This will depend on the current health of the business, as well as the industry as a whole. A business valuation can take into consideration the growth prospects of the company, especially if your business model has high growth potential. There could be strategies that you have yet to implement that could increase future growth of your business. The direction the industry you are in is trending could also determine your future growth prospects.

Intangibles and Risk Factors

Other intangibles that may be difficult to place an exact value on can play an important factor in calculating your business’s market value. This includes the size of your customer base, skilled employees, reputation, location or competitive advantage. For instance, a company that is struggling in some areas may have a terrific location, which can be an excellent growth indicator and critical in determining its value. A staff that is highly skilled, experienced and loyal, will also have a high positive impact.

A large, diversified customer base is a low risk for a potential investor and will therefore help increase the company’s value whereas a small customer base that is heavily dependent on a few customers or clients will be seen as a high risk, and be a detriment to the value. Your company’s reputation also carries considerable value. If you have a great reputation, your growth potential becomes easier to achieve, but a negative reputation could be a major obstacle in the company’s future growth and hurt the chances of selling your business, causing it to be valued lower.

Any potential edge over the competition, or competitive advantages, can help boost the value of a business and its future growth potential. If it is a sustainable advantage, it can protect the business from competition, therefore reducing risk. This can come in the form of intellectual property, a proprietary process or unique capability and this edge can mean that you can demand a higher price for your business.

Ultimately, determining the value of a business you own is not an exact science. While the aforementioned items are all important, they are not the only measurable factors. Since every business and industry is different, there could be a myriad of other things to consider. Consider this list to be a good starting point for boosting the value of your business and maximizing the sale price.

If you’re considering selling a company you own near Fort Myers, Naples or Sarasota, either now, or in the near future, getting an accurate understanding of the business’s true market value is a critical first step that could determine your next move. Why take a chance on leaving something out? Get a free market value estimate from CIBB and know where you stand.